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BP pulls back on offshore oil project in Alaska's Arctic

It was supposed to help offset the declining oil flows of the trans-Alaska pipeline, pumping up to 40,000 barrels of crude near the Arctic shores of Alaska, but now BP’s plans to develop its Liberty field have run aground.

Dawn Patience, a spokeswoman for BP, cites ongoing issues with the drilling rig, which was built for Liberty by Parker Drilling Co.

In 2010 at the same time the Deepwater Horizon drilling rig -- contracted by BP -- disastrously attempted to set new depth records in the Gulf of Mexico, BP had another technologically remarkable project under way in the Arctic.

Project fails safety standards

Apparently the rig still isn’t ready for show time.

“We have always said that we will not proceed with the project unless we can do it safely and meet all of our standards,” Patience told Petroleum News this past week. “In the end, the project as currently designed does not meet our test.”

Had BP started drilling in 2011 -- as had been planned -- the London-based oil company had expected Liberty to be producing 40,000 barrels of oil a day by 2013.

The original price tag for the development was estimated at $1.5 billion. Petroleum News reports that BP says it will now cost at least $3 billion. There’s no word on what will happen next, but Patience told Petroleum News that it would be “several more years” before BP would sink a bit.

That is, if the oil company decides to continue pursuing Liberty; the project has been considered off and on for years now.

A loss for Alaska at a crucial time

The Liberty prospect sits in federal waters, and under current laws, the state of Alaska never stood to gain much from Liberty because the overwhelming majority of the royalties from its production would go to the federal government.

In comparison, nearby Prudhoe Bay sits on state land. In 2011, Prudhoe alone generated $6.4 billion in royalties, taxes and fees for Alaska, which overall depends on such oil income from state lands to fund nearly 90 percent of state government.

Still, Alaska’s leaders were very much excited to see Liberty finally be developed.

Liberty was expected to help offset the declining flows of the trans-Alaska oil pipeline -- an 800-mile-long conduit that moves crude from Alaska’s Arctic oil fields southward to the deepwater port of Valdez, where tankers transport the oil to markets.

The oil fields on state land are in decline, however, and that could cause future issues with operating the trans-Alaska pipeline. The line was built to carry more than 2 million barrels of oil a day. It did so in the late 1980s, but has faced a steady decline ever since then.

Today, the pipeline transports less than 600,000 barrels of oil a day.

If BP can’t fill the pipeline, maybe Shell will succeed offshore

There is still hope to fill the pipeline, and this past week delivered plenty of positive news on this front.

On Tuesday, U.S. Interior Secretary Ken Salazar announced the federal governmental will soon release its five-year offshore lease program, building on a vast expansion in the 2000s to open Alaska's Arctic to exploratory oil drilling.

After years of opposition from environmental activists and some Alaska Native groups, Royal Dutch Shell is hoping to begin exploratory drilling this summer off the Arctic shores of Alaska. If Shell strikes it big, the plan is to build lines that would connect with the trans-Alaska oil pipeline, thus helping offset the declining flows.

Salazar, according to the Los Angeles Times, "made it clear that the U.S. plans to expand the march of drilling rigs into the Arctic after Shell’s initial exploratory-drilling program this summer."

The new federal lease program, which would cover the Chukchi and Beaufort seas and begin in 2016 and 2017 respectively, is expected to win final federal approval in the coming days.

Shell also announced Tuesday that federal offshore oil regulators "witnessed the deployment of the capping stack that will join Shell’s drilling fleet in Alaska" this summer, according to Alaska company spokesman Curtis Smith. "The successful deployment of Shell’s Arctic capping stack in Puget Sound means we are nearing the end of an extremely thorough inspection and permitting process that would allow for exploratory drilling in the Beaufort and Chukchi Seas this summer."

He added: "While we remain confident in our pre-staged, three-tier oil spill response capability, Shell’s Arctic-engineered capping system will allow for the capture of hydrocarbons at the wellhead in the very unlikely event of a blowout."

Still, watchdogs and environmental activists remain skeptical of Shell’s ambitions plans, mostly because of the potential for a spill in such a remote area like the Arctic.

“The upcoming Arctic Ocean lease sales in the Chukchi Sea in 2016, and in the Beaufort Sea in 2017, are premature and technically problematic,” Lois Epstein, Arctic program director for The Wilderness Society, said in a statement in response to Salazar's announcement last week.

Epstein cited a lack of cleanup technologies for the type of spill that could occur in the Arctic Ocean, an absence of an Arctic-specific offshore drilling standards, and the lack of a buffer area as reasons not to expand offshore Arctic drilling programs.